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Discover Financial Services Reports Fourth Quarter 2023 Net Income of $388 Million or $1.54 Per Diluted Share and Full Year Net Income of $2.9 Billion or $11.26 Per Diluted Share

Board of Directors Declares Semi-annual Dividend for Preferred Stock and Quarterly Dividend for Common Stock

Discover Financial Services (NYSE: DFS):

Fourth Quarter 2023 Results

 

2023

2022(1)

YOY Change

Total loans, end of period (in billions)

$128.4

$112.1

15%

Total revenue net of interest expense (in millions)

$4,196

$3,721

13%

Total net charge-off rate

4.11%

2.13%

198 bps

Net income/(loss) (in millions)

$388

$1,025

(62%)

Diluted EPS

$1.54

$3.74

(59%)

Note(s)

1. The comparative prior quarter ended December 31, 2022 has been restated to reflect immaterial corrections to the financial statements. See Reconciliation of Prior Periods in the Financial Supplement for reconciliation to previously reported results

Discover Financial Services (NYSE: DFS) today reported net income of $388 million or $1.54 per diluted share for the fourth quarter of 2023, as compared to a net income of $1.0 billion or $3.74 per diluted share for the fourth quarter of 2022.

“Discover’s performance in 2023 was driven by strong asset and deposit growth and a resilient net interest margin, while net charge-offs increased but to the low end of our expected range,” said John Owen, Discover’s Interim CEO and President. “Additionally, we have taken steps to strengthen our risk management and compliance programs; launched an important new product, Cashback Debit; and announced our new CEO. These factors position Discover to generate strong shareholder value in 2024 and beyond.”

Segment Results

Digital Banking

Digital Banking pretax income of $458 million for the quarter was $848 million lower than the prior year period reflecting a higher provision for credit losses and higher operating expenses, partially offset by increased revenue net of interest expense.

Total loans ended the quarter at $128.4 billion, up 15% year-over-year, and up 5% sequentially. Credit card loans ended the quarter at $102.3 billion, up 13% year-over-year. Personal loans increased $1.9 billion, or 23%, and private student loans increased $44 million, relatively flat from the prior period. The organic student loan portfolio, which excludes purchased loans, increased $176 million, or 2% year-over-year.

Net interest income for the quarter increased $401 million, or 13% driven by higher average receivables partially offset by net interest margin compression. Net interest margin was 10.98%, down 29 basis points versus the prior year. Card yield was 15.63%, up 113 basis points from the prior year primarily driven by higher prime rate and lower payment rates, partially offset by higher interest charge-offs. Interest expense as a percent of total loans increased 153 basis points from the prior year period, primarily driven by higher funding costs.

Non-interest income increased $44 million, or 8%, from the prior year period driven by higher loan fee income and discount/ interchange revenue as well as lower rewards cost driven by lower Cashback Match and change in the 5% category.

The total net charge-off rate of 4.11% was 198 basis points higher versus the prior year period reflecting seasoning of recent vintages with higher delinquency trends. The credit card net charge-off rate was 4.68%, up 231 basis points from the prior year period and up 65 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 3.87%, up 134 basis points year-over-year and up 46 basis points from the prior quarter. The student loan net charge-off rate was 1.52%, up 19 basis points from the prior year and up 20 basis points from the prior quarter. Personal loans net charge-off rate of 3.39% was up 190 basis points from the prior year and up 76 basis points from the prior quarter.

Provision for credit losses of $1.9 billion increased $1.0 billion from the prior year driven by a $305 million higher reserve build in the current quarter and a $717 million increase in net-charge offs.

Total operating expenses were up $267 million year-over-year, or 18%. Employee compensation and professional fees were up due to investments in compliance and risk management. Other expense increased as a result of a reserve for customer remediation and marketing expense grew to support the national Cashback Debit campaign.

Payment Services

Payment Services pretax income of $54 million was up $17 million year-over-year primarily driven by increased PULSE revenue.

Payment Services volume was $98.4 billion, up 14% from the prior year period. PULSE dollar volume was up 19% primarily driven by increased debit transaction volume. Diners Club volume was up 14% year-over-year reflecting continued strength across most regions. Network Partners volume decreased 16% from the prior year primarily reflecting lower AribaPay volume.

Dividend Declaration

The Board of Directors of Discover Financial Services declared a semi-annual cash dividend on its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series C, in the amount of $2,750 per share. The dividend equals $27.50 per depositary share, each representing 1/100th interest in a share of the Series C Preferred Stock. The dividend will be payable on April 30, 2024, to the holders of record at the close of business on April 15, 2024.

The Board of Directors of Discover Financial Services declared a semi-annual cash dividend on its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series D, in the amount of $3,062.50 per share. The dividend equals $30.625 per depositary share, each representing 1/100th interest in a share of the Series D Preferred Stock. The dividend will be payable on March 25, 2024, to the holders of record at the close of business on March 8, 2024.

The Board of Directors declared a quarterly cash dividend of $0.70 per share of common stock payable on March 7, 2024, to holders of record at the close of business on February 22, 2024.

Conference Call and Webcast Information

The company will host a conference call to discuss its fourth quarter results on Thursday, January 18, 2024, at 7:00 a.m. Central Time. Interested parties can listen to the conference call via a live audio webcast at https://investorrelations.discover.com.

About Discover

Discover Financial Services (NYSE: DFS) is a digital banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover® card, America's cash rewards pioneer, and offers private student loans, personal loans, home loans, checking and savings accounts and certificates of deposit through its banking business. It operates the Discover Global Network® comprised of Discover Network, with millions of merchants and cash access locations; PULSE®, one of the nation's leading ATM/debit networks; and Diners Club International®, a global payments network with acceptance around the world. For more information, visit www.discover.com/company.

A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financial supplement filed as Exhibit 99.2 to the company's Current Report on Form 8-K filed today with the Securities and Exchange Commission (“SEC”). Both the earnings release and the financial supplement are available online at the SEC's website (http://www.sec.gov) and the company's website (https://investorrelations.discover.com).

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as "believe," "expect," "anticipate," "intend," "plan," "aim," "will," "may," "should," "could," "would," "likely," "forecast," and similar expressions. Such statements are based on the current beliefs and expectations of our management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this press release and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance and regulatory and legal actions, including, but not limited to, those related to accounting guidance, tax reform, financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity; the actions and initiatives of current and potential competitors; our ability to manage our expenses; our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants and merchants; our ability to sustain and grow our private student loan, personal loan and home loan products; difficulty obtaining regulatory approval for, financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; our ability to manage our credit risk, market risk, liquidity risk, operational risk, legal and compliance risk and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in our investment portfolio; limits on our ability to pay dividends and repurchase our common stock; limits on our ability to receive payments from our subsidiaries; fraudulent activities or material security breaches of our or others' key systems; our ability to remain organizationally effective; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events, climate change, pandemics and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party vendors, as well as those with which we have no direct relationship such as our employees' internet service providers; our ability to maintain current technology and integrate new and acquired systems and technology; our ability to collect amounts for disputed transactions from merchants and merchant acquirers; our ability to attract and retain employees; our ability to protect our reputation and our intellectual property; our ability to comply with regulatory requirements; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our debt or equity securities.

Additional factors that could cause the company's results to differ materially from those described in the forward-looking statements can be found under “Risk Factors,” “Business - Competition,” “Business - Supervision and Regulation” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the company's Annual Report on Form 10-K for the year ended December 31, 2022, "Risk Factors" and “Management's Discussion & Analysis of Financial Condition and Results of Operations” in the company's Quarterly Report on Form 10-Q for the quarters ended September 30, 2023, June 30, 2023 and March 31, 2023 which are filed with the SEC and available at the SEC's internet site (http://www.sec.gov) and subsequent reports on Forms 8-K and 10-Q, including the company's Current Report on Form 8-K filed today with the SEC.

DISCOVER FINANCIAL SERVICES
(unaudited, in millions, except per share statistics)
Quarter Ended
Dec 31,

2023
Sep 30,

2023
Dec 31,

20221
EARNINGS SUMMARY
Interest Income

$4,868

 

$4,610

 

$3,856

 

Interest Expense

1,400

 

1,288

 

789

 

Net Interest Income

3,468

 

3,322

 

3,067

 

 
Discount/Interchange Revenue

1,158

 

1,164

 

1,154

 

Rewards Cost

788

 

787

 

797

 

Discount and Interchange Revenue, net

370

 

377

 

357

 

Protection Products Revenue

43

 

42

 

44

 

Loan Fee Income

217

 

194

 

182

 

Transaction Processing Revenue

82

 

82

 

66

 

Gains/Losses on Equity Investments

2

 

6

 

(6

)

Other Income

14

 

21

 

11

 

Total Non-Interest Income

728

 

722

 

654

 

 
Revenue Net of Interest Expense

4,196

 

4,044

 

3,721

 

 
Provision for Credit Losses

1,909

 

1,702

 

883

 

 
Employee Compensation and Benefits

646

 

575

 

573

 

Marketing and Business Development

372

 

283

 

313

 

Information Processing & Communications

170

 

149

 

143

 

Professional Fees

312

 

281

 

264

 

Premises and Equipment

25

 

22

 

48

 

Other Expense

250

 

144

 

154

 

Total Operating Expense

1,775

 

1,454

 

1,495

 

 
Income/(Loss) Before Income Taxes

512

 

888

 

1,343

 

Tax Expense

124

 

205

 

318

 

Net Income/(Loss)

$388

 

$683

 

$1,025

 

 
Net Income/(Loss) Allocated to Common Stockholders

$386

 

$647

 

$1,019

 

 
 
PER SHARE STATISTICS
Basic EPS

$1.54

 

$2.59

 

$3.74

 

Diluted EPS

$1.54

 

$2.59

 

$3.74

 

Common Stock Price (period end)

$112.40

 

$86.63

 

$97.83

 

Book Value per share

$59.29

 

$56.93

 

$53.65

 

 
BALANCE SHEET SUMMARY
Total Assets

$151,522

 

$143,432

 

$131,706

 

Total Liabilities

136,694

 

129,196

 

117,362

 

Total Equity

14,828

 

14,236

 

14,344

 

Total Liabilities and Stockholders' Equity

$151,522

 

$143,432

 

$131,706

 

 
TOTAL LOAN RECEIVABLES
Ending Loans 2

$128,409

 

$122,676

 

$112,120

 

Average Loans 2

$125,387

 

$120,380

 

$108,036

 

 
Interest Yield

14.61

%

14.44

%

13.53

%

Gross Principal Charge-off Rate

4.82

%

4.24

%

2.87

%

Net Principal Charge-off Rate

4.11

%

3.52

%

2.13

%

Delinquency Rate (30 or more days)

3.45

%

3.06

%

2.30

%

Delinquency Rate (90 or more days)

1.59

%

1.34

%

0.98

%

Gross Principal Charge-off Dollars

$1,521

 

$1,287

 

$781

 

Net Principal Charge-off Dollars

$1,298

 

$1,070

 

$581

 

Net Interest and Fee Charge-off Dollars

$279

 

$223

 

$126

 

Loans Delinquent 30 or more days

$4,427

 

$3,756

 

$2,578

 

Loans Delinquent 90 or more days

$2,045

 

$1,637

 

$1,101

 

 
Allowance for Credit Losses (period end)

$9,283

 

$8,665

 

$7,374

 

Reserve Change Build/(Release) 3

$618

 

$601

 

$313

 

Reserve Rate

7.23

%

7.06

%

6.58

%

 
CREDIT CARD LOANS
Ending Loans

$102,259

 

$97,389

 

$90,113

 

Average Loans

$99,610

 

$95,796

 

$86,396

 

 
Interest Yield

15.63

%

15.43

%

14.50

%

Gross Principal Charge-off Rate

5.50

%

4.85

%

3.20

%

Net Principal Charge-off Rate

4.68

%

4.03

%

2.37

%

Delinquency Rate (30 or more days)

3.87

%

3.41

%

2.53

%

Delinquency Rate (90 or more days)

1.87

%

1.57

%

1.14

%

Gross Principal Charge-off Dollars

$1,380

 

$1,171

 

$697

 

Net Principal Charge-off Dollars

$1,175

 

$973

 

$516

 

Loans Delinquent 30 or more days

$3,955

 

$3,324

 

$2,278

Loans Delinquent 90 or more days

$1,917

 

$1,527

 

$1,028

 

 
Allowance for Credit Losses (period end)

$7,619

 

$7,070

 

$5,883

 

Reserve Change Build/(Release) 3

$549

 

$545

 

$322

 

Reserve Rate

7.45

%

7.26

%

6.53

%

 
Total Discover Card Volume

$60,917

 

$58,965

 

$59,153

 

Discover Card Sales Volume

$57,145

 

$54,952

 

$55,663

 

Rewards Rate

1.37

%

1.42

%

1.42

%

 
SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES
Digital Banking

$458

 

$803

 

$1,306

 

Payment Services

54

 

85

 

37

 

Total

$512

 

$888

 

$1,343

 

 
NETWORK VOLUME
PULSE Network

$79,194

 

$72,146

 

$66,807

 

Network Partners

8,736

 

9,899

 

10,433

 

Diners Club International 4

10,468

 

9,723

 

9,155

 

Total Payment Services

98,398

 

91,768

 

86,395

 

Discover Network - Proprietary

58,419

 

57,228

 

58,138

 

Total

$156,817

 

$148,996

 

$144,533

 

1 The comparative prior quarter ended December 31, 2022 has been restated to reflect immaterial corrections to the financial statements. See Reconciliation of Prior Periods for reconciliation to previously reported results.
 
2 Total Loans includes Home Equity and other loans.
 
3 Excludes any build/release of the liability for expected credit losses on unfunded commitments as the offset is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition
 
4 Volume is derived from data provided by licencees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment
 
Note: See Glossary for definitions of financial terms in the financial supplement which is available online at the SEC's website (http://www.sec.gov) and the Company's website (http://investorrelations.discoverfinancial.com).
RECONCILIATION OF PRIOR PERIOD RESTATED FINANCIAL RESULTS
 
Quarter Ended - December 31, 2022 As

Previously

Reported
Restated

Impacts
As

Restated
 
EARNINGS SUMMARY
Discount/Interchange Revenue

$1,165

($11)

$1,154

Discount and Interchange Revenue, net

368

(11)

357

Total Non-Interest Income

665

(11)

654

Revenue Net of Interest Expense

$3,732

($11)

$3,721

 
Other Expense

$154

$0

$154

Total Operating Expense

$1,495

$0

$1,495

 
Income/(Loss) Before Income Taxes

$1,354

($11)

$1,343

Tax Expense

321

(3)

318

Net Income/(Loss)

$1,033

($8)

$1,025

 
Net Income/(Loss) Allocated to Common Stockholders

$1,027

($8)

$1,019

 
PER SHARE STATISTICS
Basic EPS

$3.77

($0.03)

$3.74

Diluted EPS

$3.77

($0.03)

$3.74

Book Value per share

$54.57

($0.92)

$53.65

 
BALANCE SHEET SUMMARY
Total Assets

$131,628

$78

$131,706

Total Liabilities

117,038

324

117,362

Total Equity

14,590

(246)

14,344

Total Liabilities and Stockholders' Equity

$131,628

$78

$131,706

 
SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES
Digital Banking

$1,317

($11)

$1,306

 

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